On May 16th, the euro $EURUSD fell to 1.1617 against the US dollar, hitting the lowest since April 8th, with a weekly decline of about 1.2%, marking five consecutive days of weakening.

Market Recap and Fundamental Analysis

The euro's accelerated decline is mainly driven by two major forces. On one hand, expectations of Federal Reserve rate hikes are intensifying, with the market betting that the probability of at least a 25 basis point increase by the end of the year has risen to about 37%, and US Treasury yields have surged, supporting a strong dollar index. On the other hand, geopolitical risk aversion has pushed oil prices higher, with Brent crude approaching $110 per barrel, directly pressuring the euro zone, which is highly dependent on energy imports. Additionally, the Royal Bank of Canada pointed out that overseas demand for US assets and the dollar's safe-haven role make the dollar still attractive in the short term, recommending long positions on the dollar against the euro and Swiss franc.

The eurozone's fundamentals are also concerning. Q1 GDP grew only 0.1% quarter-on-quarter and slowed to 0.8% year-on-year, well below expectations; Germany grew just 0.3%, while France saw zero growth. April inflation jumped to 3.0%, with energy prices rising 10.9% year-on-year, turning stagflation risks from warnings into reality. Services PMI fell to 47.6, a 62-month low, indicating severe weakness in domestic demand. Although the European Central Bank maintained interest rates unchanged, many institutions predict that it may be forced to hike rates in June or July to curb inflation stickiness.

Technical Outlook and Key Levels

The euro has broken below the 50-day and 200-day moving averages, with key support at 1.1560–1.1579. A break below could lead to further declines; resistance is at the 1.1669–1.1720 zone.

Institutional Outlook

Bullish Scenario: Danske Bank expects the euro to reach 1.22 against the dollar within the next 12 months, based on the core logic that the European Central Bank will raise rates in June–July consecutively, while the Federal Reserve shifts to rate cuts, sharply narrowing the short-term interest rate differential between Europe and the US.
Range-bound Scenario: Morgan Stanley previously forecasted that the euro might rally to 1.23 in Q1 2026 but would quickly fall back to around 1.16 in the second half of the year. Goldman Sachs and UBS are more pessimistic, expecting year-end levels of 1.12 and 1.10, respectively.

Easing Middle East tensions may lead to a decline in oil prices, potentially easing downward pressure on the euro; however, if the European Central Bank's rate hike in June falls short of market expectations, the euro could face additional selling pressure. High energy costs combined with political uncertainties are likely to increase volatility, and investors should carefully manage their positions.